Use the Information for the Question(s)below

question 69

Multiple Choice

Use the information for the question(s) below.
Luther Industries has no debt and expects to generate free cash flows of $48 million each year.Luther believes that if it permanently increases its level of debt to $100 million,the risk of financial distress may cause it to lose some customers and receive less favorable terms from its suppliers.As a result,Luther's expected free cash flows with debt will be only $44 million per year.Suppose Luther's tax rate is 21%,the risk-free rate is 6%,the expected return of the market is 14%,and the beta of Luther's free cash flows is 1.25 (with or without leverage) .
-The value of Luther without leverage is closest to:

• A)$315 million.
• B)$300 million.
• C)$205 million.
• D)$340 million.

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Definitions:

Significance Level

The probability of rejecting the null hypothesis when it is actually true, often denoted by alpha (α) and used as a threshold in hypothesis testing.

Percentage Points

A unit for the difference of two percentages, reflecting the absolute difference between them.

Variance

A measure of the dispersion of a set of data points around their mean value.

Population Proportion Variances

The measure of variability or dispersion of proportion values in a population, indicating how much individual proportions deviate from the average population proportion.